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Developmental Investing: Dispelling myths, moving towards partnership

Developmental Investing: Dispelling myths, moving towards partnership. ASISA Assembly June 2012. Regulation 28. Pre-amble to Regulation 28:

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Developmental Investing: Dispelling myths, moving towards partnership

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  1. Developmental Investing: Dispelling myths, moving towards partnership ASISA Assembly June 2012

  2. Regulation 28 Pre-amble to Regulation 28: [The duty to act in the interests of members] supports the adoption of a responsible investment approach to deploying capital… to earn adequate risk adjusted return... Prudent investing should give consideration to any factor which may materially affect the sustainable long term performance of a fund’s assets, including ESG factors 2

  3. Does Reg 28 encourage or require SRI/Developmental Investing? • Yes • No 3

  4. Distinguish between Responsible Investing and Developmental Investing ESG Thesis: Traditional financial analysis provides an incomplete picture of companies’ risks and potential. This is already mainstream activity 4

  5. Do funds have an obligation to ensure national development? Is SRI a fiduciary obligation? • Yes • No • Duty of Care • Duty of Loyalty • Apply skill and ability • Pay adequate attention • Exercise diligence • Be Reasonable & Prudent • Have unfettered thinking • Act in best interest of client • Act for client first • Avoidance of conflicts (avoid, disclose, recuse) • Act in Good Faith • Act only within powers granted Primary duty to members A fiduciary duty must be wilfully taken-on 5

  6. Left to their own choices retirement funds would not fund national development • Agree • Disagree

  7. Thought Leadership: Some RI tactics • Home loans to members • Platinum Funds: Local/regional development to benefit workers • Industry Fund: “Look-thru” to holdings of managers for RI/SRI • Union Fund: a) high-impact funds, b) negative screens • Sharia compliant investing • SOE Fund: High-impact, direct deals, with lower return targets • GEPF: Overal RI strategy. a) Shareholder activism, b) Dedicated high- • impact, direct and indirect fund, c) ESG screening, d) CRISA & PRI • Multimanager/s: SRI balanced funds • Medical Aid Fund: Screens out tobacco (duh!) 7

  8. How to fund R3.2trillion of infrastructure! We don’t have to! • R3.2trn is an estimate • Most of funding comes from cash flows • DFIs, Export credit, project finance, short- and long-term debt • Transport & Electricity account for +/-78% of R3.2trn spend • Transnet: Of R300bn of capex over next 7 years, only R86bn of debt • Eskom: Of Eskom’s R300bn of funding for 2012-2018, 75% is done • Perhaps R1tn of funding (30%), across sources… and over a decade 8

  9. If investors get risk adjusted returns……then who offers subsidised capital? The role of government & development finance institutions (DFIs: DBSA, IDC, Landbank, Khula, NHFC, etc, etc) 9

  10. There are tax breaks for retirement savings Does this mean… Gov’t acquires the right to direct those savings? or Gov’t is promoting savings to allow for growth; plan for retirement; and avoid elderly wards-of-the-state?

  11. SRI: Fads, Trends and Fashions… 11

  12. Prescription: The ends do not justify the means • In SA money is not the problem: Capacity to deliver is the issue • A challenge to property rights: Is it constitutional? • Create uncertainty around (and reduce) long-term savings • There is no SRI standard: Who decides what to prescribe? • Distorts capital markets... its a “tax” on returns • If government prescribes, will they underwrite the risk!? • Government can influence a) the funds where they are • direct stakeholders, and b) the well capitalised DFIs • Danger of money flood and poor deals: Value will be lost • Retirement funds are not instruments of the state 12

  13. Is it developmental? TRAC – N4 Toll Road • Johannesburg-Maputo toll road • Public-Private Partnership • 30 year concession • Privately funded and managed FSC Council: Toll roads are notinfrastructure 13

  14. SRI Principles • Investors must earn suitable returns: No compromise of risk:return • All investments are a matter of choice of funds/asset owners • There is no “one size fits all”: Investors/funds to exercise judgement • Fiduciaries to members, not the nation • Subsidies/kick-starts are the job of government • Regulation is very difficult, conflicted and subjective • SRI should be seen as an opportunity, not a threat Funds can deliver impact while also looking after their members 14

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